A group of financial services companies have collaborated to detail what a bank of a zero-carbon world must look like, which they describe as the “triple-A bank of the future”.

Climate Safe Lending (CSL), a network of banks and other financial firms, including ABN Amro, Positive Money and Boston Common Asset Management, has produced a report entitled ‘Taking the Carbon Out of Credit’, which aims to demonstrate how lenders should remove all association with carbon emissions from their books in order to keep global warming below 2°C above pre-industrial levels.

CSL proposes banks strive to meet a ‘triple A’ rating for “climate safety, sustainability and resilience”, drawing comparisons with the traditional ‘AAA’ rating for credit worthiness.

Companies attaining this designation would “anticipate risk”, “add value” and “act now”.

Anticipating risk means assessing clients through “reality-based expectations” and recognising the contribution that they would make to these.

Banks meanwhile can add value to their sustainable lending proposition by tasking clients with demonstrating their decarbonisation achievements or meeting other challenges.

The paper proposes 10 such strategies to achieve this such as creating sector decarbonisation plans, offering financial incentives through compensating for the costs of transitioning, and mobilising retail clients through communicatons and products that engage customers who are most concerned about climate change, such as millennials.

Finally, CSL asserts that institutions must demonstrate readiness to move with urgency, though acknowledging this is difficult given the “levels of uncertainty attaching to data or methodologies”.

Past failures and ongoing pitfalls

The report hits out at banks that have made green commitments while continuing to support fossil fuel companies. Plotting some of the world’s banking giants, CSL suggests that the likes of JP Morgan, Wells Fargo and Citi’s average investment in fossil fuel finance continues to outstrip those made in greener initiatives.

Banks must also be held to greater account in meeting commitments such as those set out by the Taskforce for Climate-related Financial Disclosures (TCFD), set up in 2015. This recommended that institutions disclose physical and transitional risks across 11 different areas.

However, according to the TCFD, as of 2018 only one in five banks was disclosing the “resilience of their organisation’s strategy”. CSL interprets this as a possible failure of the TCFD to be engage in appropriate conversations with lenders and other institutions around their responsibilities.

The report also acknowledges the dangers of creating the wrong sort of culture in the lending industry through making climate action too dependent on meeting targets.

Given the problem of targets distorting the actions they are meant to encourage, lenders “may inadvertently incentivise the wrong type of activity”, through cherry picking projects that are easy and offer a visible result, such as selling off certain parts of their portfolios.

This therefore demands a very broad approach by lenders in stimulating change amongst their clients. New business models that incentivise sector change should be prioritised by lenders over simple meeting of targets and ticking of boxes.

Climate change should not be thought of as an “isolated and discrete problem”, the report asserts, but rather part of a wider range of social risks. Taking a holistic view would allow lenders to assess current impacts more strategically while working to reduce further future risks and increasing positive contribution.

CSL suggests that lenders follow the UN Principles of Responsible Banking which encourage banks to consider the areas in which they have the greatest impact and where they can make the most influential change.

This would however make taxonomy at government or regulator level harder as there would be less uniformity across the industry due to lenders from different regions and specialisms would naturally be acting differently.